Edited version of your written advice

Authorisation Number: 1013064347078

Date of advice: 10 August 2016

Ruling

Subject: Deceased estate

Question

Will the Commissioner exercise the discretion under section 99A(2) of the Income Tax Assessment Act 1936 (ITAA 1936) to tax the income of the trust estate under section 99 of the ITAA 1936?

Answer

Yes.

This ruling applies for the following period

Financial year ended 30 June 2015

The scheme commenced on

1 July 2014.

Relevant facts

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The testamentary trust was created by the will of the deceased.

The trust owns real property that was contributed to the trust by the deceased.

The trust has a loan receivable from person A that was funded entirely out of trust capital.

This was lent to the trust by person B (in his personal capacity) and was used to pay for legal fees pertaining to formation of the trust.

The loan was partly repaid by the trust during the 20XX year, with the remainder repaid during the 20YY year.

No special rights or privileges have been attached to, or conferred upon, the trust's property.

Under the will a number of assets were left in trust for the deceased's beneficiaries until they reach the age of X years.

Each beneficiary was assigned a particular asset and a proportionate share of the accumulated income conditional upon reaching X years old.

The trust has no liabilities and each year the trustee will be assessable on the net income of the trust as no beneficiary is presently entitled.

Relevant legislative provisions

Section 99 of the Income Tax Assessment Act 1936;

Section 99A of the Income Tax Assessment Act 1936;

Subsection 99A(2) of the Income Tax Assessment Act 1936;

Section 12 of the Income Tax Rates Act 1986;

Schedule 10 of the Income Tax Rates Act 1986.

Reasons for decision

Summary

It is appropriate for the Commissioner to exercise his discretion to tax the trustee under section 99 of the Income Tax Assessment Act 1936 (ITAA 1396).

Detailed reasoning

Deceased estates and testamentary trusts

A deceased estate comes about because of a person's death and is merely about determining and distributing the net assets of the deceased. A testamentary trust is generally set up because of the deceased's instructions and goes beyond just determining and distributing net assets. It generally requires the retention of some or all of the assets for a specific time and purpose.

As outlined in Tax Ruling IT 2622 Income tax: present entitlement during the stages of administration of deceased estates a deceased estate represents a legal entity or relationship quite separate from a testamentary trust.

In your case, you are sole executrix and trustee for your relatives' deceased estate. Clause 4(b) of the will states that the grandchildren will each be paid their share of the estate upon the beneficiary attaining the age of X years.

As the administration of the deceased estate is finalised, no further trust returns for the deceased estate is required and therefore no tax is payable by you as trustee of the deceased estate.

However, as money is to be kept in trust for the beneficiaries, a testamentary trust should be established.

Consequently a tax file number issued for a deceased estate should not be used for a testamentary trust as the two trusts are separate and distinct entities. It is appropriate to request a new tax file number for a testamentary trust.

Tax on trust income

The method of taxing trust income varies according to whether or not a beneficiary of a trust is 'presently entitled' to the income of the trust and if they are under a legal disability or not.

Beneficiaries are presently entitled to the income of a deceased estate if they have an indefeasible, absolutely vested interest in the income. In other words, the beneficiaries have a claim or interest in the income that cannot be defeated by another person. They must also be able to demand immediate payment of the income. This means that beneficiaries can be presently entitled even though they may not have actually received an income distribution.

Under the terms of your relatives' will, part of the estate is for the beneficiaries who shall be living at the date of their death and attain the age of X years and if more than one then equally.

As the income is not paid to the grandchildren if they do not attain the age of X, the beneficiaries right to income is contingent only. In other words, the interest in the trust can be taken away if the minor does not attain the age of X.

Therefore, as the grandchild does not have an absolute, vested indefeasible interest in the trust, they are considered not to be presently entitled to the net income of the trust prior to them turning X.

As a grandchild is not presently entitled to the income, the income of the trust is assessed to the trustee either under section 99A of the ITAA 1936 or section 99 of the ITAA 1936.

Please note that when a grandchild attains the age of X, they are presently entitled to their share of the trust income and therefore will be assessable on that income from that date.

Initially, all net income of a trust to which no beneficiary is presently entitled falls under section 99A of the ITAA 1936 and is taxed at the maximum rate of personal tax.

However, subparagraph 99A(2)(a)(i) of the ITAA 1936 provides that the maximum rate of personal tax will not apply to a trust estate that resulted from a will if the Commissioner is of the opinion that it would be unreasonable for the special rate of tax to apply to that trust income. If the Commissioner is of the opinion that it would be unreasonable for the maximum rate of personal tax to apply to the trust income, the more concessional rate of tax will apply under section 99 of the ITAA 1936.

As the trust is created in consequence of a will, the discretion under subsection 99A(2) of the ITAA 1936 is exercised to assess the income of the trust in accordance with section 99 of the ITAA 1936.

The rates of tax for trustees assessed under section 99 are found in section 12(6) of the Income Tax Rates Act 1986 (ITRA 1986), which directs attention to Schedule 10 of the ITRA 1986.

Trustees of testamentary trusts are liable to tax at the rates specified for resident individuals except that they do not benefit from the usual tax free threshold, but rather a reduced tax free threshold of $416 applies.

Where the income to which no beneficiary is presently entitled is greater than $416 or the relevant threshold, a trust tax return is to be lodged. The trustee of the trust is responsible for lodging the trust's tax return.

For the 2015-16 financial year, income between $416 and $670 is taxed at 50%, and for amounts in excess of $670, the rate of 19% is applied until taxable income exceeds $37,000. Further details are outlined in the table below. Please note the tax rates may change in future years.

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